1. Estonia enters Euroland:
A two-speed Baltic development ahead?
Riga, 11 November, 2010
Morten Hansen
Head of Economics Department,
Stockholm School of Economics in Riga
Director, NMS Consulting
morten.hansen@sseriga.edu.lv

2. 1st idea:
The Baltics: Growing apart? Effects of Estonia joining Euroland
• The Baltic countries are (so!) often pooled together as if they could
best be described as one entity
• They sometimes can…
• But perhaps it is increasingly misleading to think and do so !!!
• Several reasons to believe that the future will imply divergence

3. 2nd idea:
The crisis is over! (sort of…)
• Just look at the data!
• But convincing people may be harder….
• December 2008 – October 2009:
The age of diminished expectations:
One could have been forgiven for believing that the Baltic
economies (notably Latvia’s) were on the verge of collapse

4. EE, LV, LT: Similarity… GDP growth
‘Baltic Tigers’
… at least until the crisis struck
15
10
5
0
Estonia
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
-5 Latvia
-10 Lithuania
-15
-20
-25

5. EE, LV, LT: Similarity…GDP growth
But scratch the surface and the similarities become differences
15
10
5
0
Estonia
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
-5 Latvia
-10 Lithuania
-15
-20
-25

6. EE, LV, LT: Crisis response
Estonia
• Fiscal strangulation to meet the Maastricht criteria to enter the
Promised Land, aka the eurozone
Latvia
• Parex trouble, default looming – call in the cavalry i.e. the IMF and
EU
• Then see no evil, hear no evil, say no evil until June 2009
Lithuania
• Reasonable fast fiscal response but not so tough as in Estonia

7. EE, LV, LT: Status, mid-to-late 2010
Estonia
• Invited to join the eurozone 1 January 2011
Latvia
• Draconian cuts and more is needed
• Troublesome election – ahem – was not so troublesome….
Lithuania
• Muddling along decently

8. EE, LV, LT: Divergence?
Estonia
• Being part of the eurozone may attract more foreign investment
• Also investment that was otherwise meant for LV or LT
Latvia and Lithuania
• The two sick men of the Baltics?

9. EE, LV, LT: Outlook
Estonia
• Poised for a post-euro surge
Latvia
• Hopefully Estonia’s euro success will inspire
• Reform – reform – reform
Lithuania
• Better positioned than Latvia
• But still too reliant on economic activity in the east

10. EE, LV, LT: The aftermath of recession
Estonia
• Fiscal policy extreme – extreme (perverse !) flexibility
• Fits well into the eurozone
Latvia
• Amazing !!!
• Hang on to the IMF!!!
• But long term unemployment?
Lithuania
• Long term unemployment?
• Competitiveness?

11. EE, LV, LT: The immediate future
No return to the ‘Tiger’ days…
Estonia
Euro effect
Latvia
Overleveraged consumers and companies
Migration?
Lithuania
Migration?
Competitiveness?

12. -40
-30
-20
-10
0
10
20
30
I
II
III
IV
V
VI
VII
2004
VIII
IX
X
XI
XII
I
II
III
IV
V
VI
VII
2005
VIII
IX
X
XI
XII
I
II
III
IV
V
VI
VII
2006
VIII
IX
X
XI
XII
I
II
III
IV
V
VI
VII
2007
VIII
IX
X
XI
XII
I
II
III
IV
V
VI
VII
2008
VIII
IX
X
XI
XII
I
II
III
IV
V
VI
VII
2009
VIII
IX
X
XI
XII
I
II
III
IV
But (Idea 2) – substantial parts of the crisis are over
V
Example: Retail sales, growth y-o-y (Latvia), (constant prices)
2010
VI
VII
VIII
IX

13. EE, LV, LT: Idea/conclusion
No return to the ‘Tiger’ days, but still…
Estonia, Latvia, Lithuania:
Retail sales 
Manufacturing 
Industrial production 
GDP 
- but admittedly, from a low base
But this is not:
Portugal - very slow on reforms, way behind the Baltics
Ireland - 32% of GDP budget deficit
Greece - bankrupt by 2013
Spain - 20+% unemployment and rising

14. Thank you!
Questions / comments are welcome!
Stockholm School of
Economics in Riga